Abstract

I study a bargaining game in which a seller makes offers to a buyer. The buyer is privately informed about her valuation, and the seller privately observes her stochastically changing production cost. The seller's time-varying private information gives rise to new dynamics. Prices fall gradually at the early stages of negotiations, and trade is inefficiently delayed. Inefficiencies persist even when gains from trade are common knowledge. Privately observed costs lead to lower welfare, higher seller revenue and lower buyer surplus (especially for high-value buyers) relative to a setting with publicly-observed costs.